An exit scam is a form of fraud in which the creators or operators of a business (often a cryptocurrency project, an investment platform or even an e-commerce site) collect funds from users/investors and then suddenly disappear with the money.
How does an exit scam work?
The process of an exit scam usually involves several steps:
- Creating an appearance of legitimacy: Scammers launch a project, platform or product that appears credible and attractive.
- Attracting investors: Through aggressive marketing and exaggerated promises, scammers convince large numbers of people to invest money in their project.
- Raising funds: Investors buy tokens or deposit money on the platform and customers pay for products or services. Scammers accumulate a significant amount of money.
- Disappearance (the “exit”): At some point, when they have raised enough capital, the project creators simply disappear. The website becomes inactive, social media accounts are deleted, and all forms of communication are cut off.
In crypto, a more accurate version of exit scam is rug pull. Exit scam is a broader term that applies to any type of business (not just crypto) where the founders disappear with the money. Rug pull is a term specific to the crypto ecosystem and directly refers to the action of “pulling the rug out from under the feet” of investors. It’s often associated with DeFi (Decentralized Finance) projects or new token launches, where developers remove liquidity from a pool (rendering the token worthless) or suddenly sell a massive amount of tokens they own, crashing the price.
Why exit scams proliferate in the crypto world
- Lack of regulation: The crypto space provides fertile ground for such fraud, as there is no central authority to enforce accountability or protect investors.
- Anonymity: The anonymity offered by blockchain technology can make it difficult to identify and track scammers.
- Promises of high returns: People’s desire for quick and significant returns makes them vulnerable to unrealistic promises.
- Difficulty recovering funds: Once the money is gone, it is extremely difficult, almost impossible, for victims to recover their investments.
Warning signs of a potential exit scam
- Promises of exaggerated and guaranteed returns.
- Lack of transparency: The team behind the project is anonymous or has an unclear track record.
- Excessive and aggressive marketing with an emphasis on “fomo”(fear of missing out ).
- Lack of a functional product or clear business model.
- A vague or ambiguous whitepaper (the document describing the technical and economic project).
- Communication channels that suddenly become inactive or are closed.
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